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Monday, August 2, 2010

Malaysia's foreign inflows fall 80%

KUALA LUMPUR: A steep plunge in foreign direct investment (FDI) into Malaysia last year is challenging the government's ambitious plans to grow the economy rapidly to become a high-income nation, economists say.

The United Nations Conference on Trade and Development's World Investment Report 2010, released last week, shows that FDI fell by 80 per cent last year from 2008. Foreign investors brought in RM4.4 billion (S$1.9 billion) last year, compared to RM23.4 billion in 2008.

'FDI fell in all developing countries last year but Malaysia showed a very sharp fall,' University of Malaya economics professor Rajah Rasiah told The Straits Times.

He said Thailand and Indonesia did not contract as severely.

On top of that, the data also shows that Malaysian companies continued to invest more abroad than at home.

Investment outflows were a hefty RM25.7 billion last year and RM48 billion in 2008, continuing a trend that began in 2007.

These investment moves have become a challenge to Malaysia's goal to grow by 6 per cent annually to raise national income from US$8,260 (S$11,260) to US$12,140 in five years.

To expand strongly, private investments in the country have to grow by 12.8 per cent a year, or by RM115 billion, according to the 10th Malaysia Plan, a five-year development blueprint for next year to 2015.

Emeritus Professor of economics Mohamed Ariff told The Straits Times that the steep fall in foreign inflows was worrying because Malaysia's growth is dependent on private investments.

He said FDI was important, not just for capital, but also for access to new technologies, trade links and markets.

Domestic capital was not an adequate substitute, he said.

Minister of International Trade and Industry Mustapa Mohamed, however, said on Tuesday that the fall in investments was not worrying because it was due to a structural change.

He said a RM1 billion investment may bring less benefits than a RM10 million one that offered more high-paying jobs.

'We are beginning to attract quality investments,' he said.

[Sure. A RM1b investment in low-tech industry is not as good as a RM10m one that offered more high-paying jobs to your cronies. But surely a RM1b investment that offered high-paying jobs is way better than a RM10m investment? So yeah, you're beginning to attract quality investments, but for every RM1 of quality investment you lose RM99 of lower quality investments which means less jobs for the lower wage workers.]

He also said FDI inflow from January to March this year was almost as much as the total for the whole of last year.

But Prof Ariff, who was head of the Malaysian Institute of Economic Research until last year, said the fall in investments cannot be explained away so easily.

'It's not a one-off thing or a small drop. Investments have been declining for a while and Malaysia has been lagging in the region,' he said.

Mr Tony Pua, a Democratic Action Party MP who is also its economic adviser, pointed out several 'firsts' that suggested a steady decline.

He said that having lost out to Thailand, Indonesia and Vietnam in recent years, Malaysia recorded lower FDI than the Philippines for the first time last year.

The data also shows that this was the first time Malaysia drew under US$2 billion in the last 20 years other than in 2001. Malaysia was also the only South-east Asian country to show higher outflows than inflows.

Prof Rajah believed that the main cause of the decline was the country's low- skilled labour base.

He said that when FDI started to slow in 1993 - due to the labour shortage - Malaysia took steps to focus on technology.

But these measures were ineffectively managed by officials who were not integrated into the industry networks, while Malaysia's race policy closed the door to the best talent.

'We did not evolve the people's capabilities,' he said.

He said Malaysia now has only 300 to 400 technology workers for every one million people, compared to 3,000 per million in countries which had transited from middle- to high-income status.

Prof Ariff said the problem was complex as it involves disparate factors ranging from education to the judiciary, bureaucracy and race-based policies.

These required strong political will to reform.

'The Prime Minister is taking some bold steps, and maybe it's too early for results. But Malaysia must stop being in denial,' he said.

[Hopefully, it's too early for results. The alternative is that it is too late for any results.]

carolynh@sph.com.sg

A tale of two economies

INDONESIA

FDI last year was S$14.3 billion; this year, it is expected to reach S$17.9 billion